Who controls the future of finance?

18 December 2017

Best-selling author Chris Skinner ponders the power struggle between old, nowadays and future of finance industry.

There's an old joke about the guy lost driving in the countryside who stops to ask a pedestrian how to get to the city. The pedestrian replies: “Oh, if you want to get there, I wouldn’t start from here”.

This is exactly how banks feel today. They want to achieve the nirvana of new technologies, but are stuck in a spaghetti of old systems. Call them legacy, call them handcuffs – whatever they are, they’re a problem. Old systems and legacy technologies stop banks moving forwards into the nimble and agile future on offer today, and this is exactly what fintech start-ups believe they can exploit, as it is clearly a weakness for the larger banks.

What we are seeing is many new companies launching capabilities built upon the latest internet-enabled technologies. These include easy-to-use apps for customers, simple-to-add code for merchants and open systems to allow anyone to work with them. It is almost like banking in an app store. Hundreds of companies offering thousands of services that are simple and easy for sending and receiving money.

These companies include firms like Stripe, a six-year-old start-up responsible for the preferred code for building online checkout services. Easy to work with, the company is the chosen system for many other innovative companies, including Kickstarter and Apple Pay, and was valued at almost $10billion at the end of 2016. The company is worth that much because it has taken something the banks make difficult – setting up online payment services – and made it incredibly easy.

There are other companies doing similar things in lending, savings, investments and other areas of financial services that incorporate internet technologies – companies with names like Zopa, Smartypig, Nutmeg, etoro, with a youthful outlook, fun branding and cool offices. These financial technology start-ups (or “fintech” for short) are a world away from the traditional stuffy image of traditional banking. They share many of the same attributes, in terms of being young, aspirational, visionary and capable. This is why collectively they have seen investments from venture capital and other funds averaging $25billion for the last four years, according to figures published by Ernst & Young.

The most successful fintech firms are not replacing banks but serving markets that were under-served. Those involved in easy investing, better access to funding, support for small businesses or turning smartphones into points-of-sale are the fintech firms that have the highest valuations and greatest success. They are succeeding by addressing areas that banks find difficult to serve due to cost or risk, such as lending to small businesses.

None of these new firms have replaced the regular banks – yet. Almost 50 new banks have launched in the UK, many of which are fintech banks. Atom, Starling, Monzo and more have bank licences from the UK regulator and considerable funding. But they are up against big institutions with millions of customers, billions in funding and centuries of history. For new players, fighting the large banks is going to be a challenge and they will need a lot of funding to succeed. They will need real differentiation and exceptional digital services.

Even then, will customers switch? The one thing the new players have from the start is fresh technologies, no legacy and unconstrained thinking. Equally, they have no cost overheads and therefore can compete more effectively on interest rates. After all, big banks have an awful lot of branches that aren’t used much anymore. In fact, it may not be attractive to their customers or the media to shut down these branches but, if they do not, then the established banks will have difficulties compete with these new digital start-ups, even with their millions of customers.

The struggle for who controls the future of banking will be an interesting one between a host of new digital players and a handful of larger institutions who will need to start thinking about how to devote their considerable resources into staying ahead of the curve themselves…

Chris Skinner is an independent commentator on finance and fintech and author of the bestselling books Digital Bank and ValueWeb, and has been named in The Top 40 Fintech Influencers Globally by the Wall Street Journal. Read more at his blog: https://thefinanser.com